Australian legal opinion on nature risks for directors may ripple to Singapore

Directors who fail to identify their companies’ impact on nature and address the resulting risks could face legal consequences for breaching their duties, according to a new legal opinion in Australia.

While the opinion was focused on Australia, Singapore directors should pay heed. Forest and biodiversity conservation in South-east Asia are coming under greater scrutiny, and companies here are behind the curve when it comes to reporting and managing their risks and opportunities on that front.

The Australian opinion, published in October, was commissioned by climate change advisory Pollination and the Commonwealth Climate and Law Initiative. It makes clear that Australian company directors who fail to consider nature-related risks could be found liable for breaching their duty of care and diligence.

Nature-based risks are already relevant to the duties of directors and “not something that can be deferred for consideration”, said Laura Waterford, a director at Pollination.

“I don’t necessarily expect that there will be enforcement in the short term of these obligations under corporations law. But part of the purpose of the opinion is to make it clear that that could be the case. And directors are getting on notice that they should be taking steps now to insulate themselves,” she told The Business Times.

An example of a nature-related risk is the spread of varroa mite in Australia, which if left untreated, will kill all of the country’s honey bee colonies. This is not just a threat to honey producers, but also impacts those in agriculture with direct and supply chain dependencies on pollination from bees.

Regulatory changes also present new risks. For instance, EU regulations on deforestation-free supply chains went into force in June. For Australian beef exporters, there is a risk that larger trading partners could introduce similar regulations.

Even sectors that are further removed from natural ecosystems are exposed to nature-related risks. For instance, a data centre using certain metals in its equipment would have to pay attention to how they are mined. Property developers would have to look into the supply chains for building materials, such as steel, glass and sand.

Relevance to Singapore

The Australian opinion may not appear immediately relevant to Singapore, but it is still worth paying attention to. The publication of the opinion comes as companies all over the world face growing pressure to be accountable for their use of natural resources.

In last year’s edition of the United Nations biodiversity summit, or COP15, 195 countries agreed to protect and restore at least 30 per cent of the planet’s land and water by 2030.

In a speech at COP15, Singapore’s central bank chief Ravi Menon noted that nature and biodiversity loss is happening alongside the climate crisis, with steep costs. For instance, the 2015 Indonesian forest fires cost US$151 million in immediate health impacts, with the long-term costs yet to be quantified.

“Along with the climate crisis, the nature crisis is the existential challenge of our times. We cannot focus on one and hope the other will take care of itself. We need to address them both in a holistic manner,” he said.

This has raised the urgency for companies to make nature-based disclosures. In September, the Taskforce on Nature-related Financial Disclosures (TNFD) – an international working group of business and finance executives – published guidelines for companies to explain their nature-related risks and opportunities to stakeholders.

The guidelines build upon the earlier work of the Task Force on Climate-Related Financial Disclosures (TCFD), whose recommendations are increasingly being adopted worldwide, including in Singapore. Like climate disclosure, nature disclosures too could eventually become more widely used and even made mandatory.

These developments signal that “the world, in terms of investor expectations and political action, is really starting to move on nature and biodiversity,” said Waterford.

For now, the region is still far behind on nature reporting. A study last year found the overall nature disclosure rate among Asia-Pacific listed companies to be just 31.4 per cent, based on the top 50 companies by market capitalisation across 13 jurisdictions.

Singapore’s disclosure rate stood at 27.1 per cent, lagging behind most other jurisdictions, such as Japan, Australia and Malaysia.

That said, observers such as Waterford see nature risks “quickly rising up the agenda” in South-east Asia, especially with scrutiny on the region’s deforestation.

She believes that the most important step directors can take now is to engage with the recommendations of the TNFD, such as in mapping and analysing their supply chains and putting internal processes in place to mitigate risks.

“Over time, as we’ve seen with the TCFD, the expectation is that companies (that) complete their reporting and disclosures in line with the TNFD will grow over time. Now is really the most important time to be building readiness to engage with the framework,” she said.

Source: Business Times © SPH Media Limited. Permission required for reproduction.

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